Chapter 4 - Student

Chapter 4-1

Intermediate Accounting

14th Edition

4Income Statement and

Related Information

Kieso, Weygandt, and Warfield

Prepared by Coby Harmon, University of California, Santa Barbara; Adapted by Ashley Stark, Dickinson State University

Chapter 4-2

Evaluate past performance.

Income StatementIncome StatementIncome StatementIncome Statement

LO 1 Understand the uses and limitations of an income statement.

Help assess the risk or uncertainty of achieving future cash flows.

Predicting future performance.

Usefulness

Chapter 4-3


Limitations


Companies omit items that cannot be measured reliably.

Income is affected by the accounting methods employed.

Income measurement involves judgment.

Chapter 4-4

Companies have incentives to manage income to meet or

beat Wall Street expectations, so that

market price of stock increases and

value of stock options increase.



Quality of earnings is reduced if earnings management

results in information that is less useful for predicting future

earnings and cash flows.

Quality of Earnings

Chapter 4-5

Format of the Income StatementFormat of the Income StatementFormat of the Income StatementFormat of the Income Statement


Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations.

Sales

Fee revenue

Interest revenue

Examples of Revenue Accounts

Elements of the Income Statement

Dividend revenue

Rent revenue

Chapter 4-6



Expenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations.

Examples of Expense Accounts


Cost of goods sold

Depreciation expense

Interest expense

Rent expense

Salary expense

Chapter 4-7



Gains and losses can result from

sale of investments or plant assets,

settlement of liabilities,

write-offs of assets.


Gains – Increases in equity (net assets) from peripheral or incidental transactions.

Losses - Decreases in equity (net assets) from peripheral or incidental transactions.

Chapter 4-8

Single-Step FormatSingle-Step FormatSingle-Step FormatSingle-Step Format

LO 2 Prepare a single-step income statement.

Income Statement (in thousands)

Revenues:

Sales 285,000$

Interest revenue 17,000

Total revenue 302,000

Expenses:

Cost of goods sold 149,000

Selling expense 10,000

Administrative expense 43,000

Interest expense 21,000

Income tax expense 24,000

Total expenses 247,000

Net income 55,000$

Earnings per share 0.75$

Revenues

Expenses

Net Income

Single- Step

Single- Step

No distinction between Operating and Non-operating categories.

Single-Step Income Statement

Chapter 4-9

Administrative expense: Revenues:

Officers' salaries 4,900$ Sales 96,500$

Depreciation 3,960 Rental revenue 17,230

Cost of goods sold 63,570 Total revenues 113,730

Rental revenue 17,230 Expenses:

Selling expense: Cost of goods sold 63,570

Transportation-out 2,690 Selling expense 17,150

Sales commissions 7,980 Administrative exense 8,860

Depreciation 6,480 Interest expense 1,860

Sales 96,500 Income tax expense 7,580

Income tax expense 7,580 Total expenses 99,020

Interest expense 1,860 Net income 14,710$

Income Statement

For the year ended Dec. 31, 2012

Single-Step FormatSingle-Step FormatSingle-Step FormatSingle-Step Format

LO 2 Prepare a single-step income statement.

E4-4: Prepare an income statement from the data below.

Chapter 4-10

Separates operating transactions from

nonoperating transactions.

Matches costs and expenses with related revenues.

Highlights certain intermediate components of

income that analysts use.

LO 3 Prepare a multiple-step income statement.

Multiple-Step Income Statement


Chapter 4-11

1. Operating section

2. Nonoperating section

3. Income tax

4. Discontinued operations

5. Extraordinary items

6. Earnings per share


Multiple-Step FormatMultiple-Step FormatMultiple-Step FormatMultiple-Step Format

Intermediate Components of the Income Statement

Chapter 4-12

Multiple-Step FormatMultiple-Step FormatMultiple-Step FormatMultiple-Step Format


The presentation divides information into major sections.


Sales 285,000$


Gross profit 136,000

Operating expenses:

Selling expenses 10,000

Administrative expenses 43,000

Total operating expense 53,000

Income from operations 83,000

Other revenue (expense):


Interest expense (21,000)

Total other (4,000)

Income before taxes 79,000


Net income 55,000$

1. Operating Section

2. Nonoperating Section

3. Income tax

Chapter 4-13

Administrative expense: Sales 96,500$

Officers' salaries 4,900$ Cost of goods sold 63,570

Depreciation 3,960 Gross profit 32,930

Cost of goods sold 63,570 Operating Expenses:

Rental revenue 17,230 Selling expense 17,150

Selling expense: Administrative exense 8,860

Transportation-out 2,690 Total operating expenses 26,010

Sales commissions 7,980 Income from operations 6,920

Depreciation 6,480 Other revenue (expense):

Sales 96,500 Rental revenue 17,230

Income tax expense 7,580 Interest expense (1,860)

Interest expense 1,860 Total other 15,370

Income before tax 22,290


Net income 14,710$

Income Statement

For the year ended Dec. 31, 2012

Multiple-Step FormatMultiple-Step FormatMultiple-Step FormatMultiple-Step FormatIllustration (E4-4): Prepare an income statement from the data below.

Chapter 4-14

Irregular items fall into six categories

1. Discontinued operations.

2. Extraordinary items.

3. Unusual gains and losses.

4. Changes in accounting principle.

5. Changes in estimates.

6. Corrections of errors.

Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items

LO 4 Explain how to report irregular items.

Chapter 4-15

Occurs when,

(a) company eliminates the

results of operations and

cash flows of a component.

(b) there is no significant continuing involvement in that

component.

Amount reported “net of tax.”



Discontinued Operations

Chapter 4-16

Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 for the year. During the year, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 for the year. Assume a tax rate of 30%. Prepare a partial income statement for KC.

Reporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued Operations


Chapter 4-17

Reporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued Operations

Discontinued

Operations are reported

after “Income from

continuing operations.”

Previously labeled as “Net Income”.

Moved to

LO 4


Total other (4,000)



Income from continuing operations 55,000

Discontinued operations:

Loss from operations, net of tax 315

Loss on disposal, net of tax 189

Total loss on discontinued operations 504

Net income 54,496$


Sales 285,000$ Cost of goods sold 149,000


Chapter 4-18

Extraordinary items are nonrecurring material items that

differ significantly from a company’s typical business activities.

Extraordinary Item must be both of an

Unusual Nature and

Occur Infrequently

Company must consider the environment in which it operates.

Amount reported “net of tax.”



Chapter 4-19

Are these items Extraordinary?

YESYES

NONO

LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.

Reporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary Items

Chapter 4-20

Illustration: KC Corporation had after tax income from continuing

operations of $55,000,000 during the year. In addition, it suffered

an unusual and infrequent pretax loss of $770,000 from a volcano

eruption. The corporation’s tax rate is 30%. Prepare a partial

income statement for KC Corporation beginning with income from

continuing operations.



Chapter 4-21

Extraordinary Items

are reported after

“Income from continuing

operations.”

LO 4




Total other (4,000)




Extraordinary loss, net of tax 539

Net income 54,461$




Previously labeled as “Net Income”.

Moved to


Chapter 4-22

Reporting when both

Discontinued

Operations and

Extraordinary Items

are present.

Discontinued Operations

LO 4





Loss from operations, net of tax 315

Loss on disposal, net of tax 189


Income before extraordinary item 54,496

Extraordinary loss, net of tax 539

Net income 54,496$




Extraordinary Items


Chapter 4-23

Material items that are unusual or infrequent, but not both,

should be reported in a separate section just above “Income

from continuing operations before income taxes.”

Examples can include:

Write-downs of inventories

Foreign exchange transaction gains and losses

The Board prohibits net-of-tax treatment for these items.



Unusual Gains and Losses

Chapter 4-24

Retrospective adjustment.

Cumulative effect adjustment to beginning retained

earnings.

Approach preserves comparability.

Examples include:

► change from FIFO to average cost.

► change from the percentage-of-completion to the

completed-contract method.



Changes in Accounting Principles

Chapter 4-25



Change in Accounting Principle: Gaubert Inc. decided in March 2012 to change from FIFO to weighted-average inventory pricing. Gaubert’s income before taxes, using the new weighted-average method in 2012, is $30,000.

Illustration 4-10Calculation of a Change inAccounting Principle

Illustration 4-11Income StatementPresentation of a Changein Accounting Principle (Based on 30% tax rate)

Pretax Income Data

Chapter 4-26

Accounted for in the period of change and future

periods.

Not handled retrospectively.

Not considered errors or extraordinary items.

Examples include:

► Useful lives and salvage values of depreciable assets.

► Allowance for uncollectible receivables.

► Inventory obsolescence.



Changes in Estimate

Chapter 4-27

Change in Estimate: Arcadia HS, purchased equipment for

$510,000 which was estimated to have a useful life of 10 years

with a salvage value of $10,000 at the end of that time.

Depreciation has been recorded for 7 years on a straight-line

basis. In 2012 (year 8), it is determined that the total estimated

life should be 15 years with a salvage value of $5,000 at the end

of that time.

Questions:

What is the journal entry to correct the prior years’

depreciation?

Calculate the depreciation expense for 2012.

Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example


Chapter 4-28

Result from:

► mathematical mistakes.

► mistakes in application of accounting principles.

► oversight or misuse of facts.

Corrections treated as prior period adjustments.

Adjustment to the beginning balance of retained earnings.



Corrections of Errors

Chapter 4-29

Corrections of Errors: To illustrate, in 2013, Hillsboro Co.

determined that it incorrectly overstated its accounts

receivable and sales revenue by $100,000 in 2010. In 2013,

Hillboro makes the following entry to correct for this error

(ignore income taxes).



Chapter 4-30

Relates the income tax expense to the specific items that give

rise to the amount of the tax expense.

Income tax is allocated to the following items:

(1) Income from continuing operations before tax.

(2) Discontinued operations.

(3) Extraordinary items.

(4) Changes in accounting Principle

(5) Correction of errors

Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues

LO 5 Explain intraperiod tax allocation.

Intraperiod Tax Allocation

Chapter 4-31

Extraordinary Gain: Schindler Co. has income before income

tax and extraordinary item of $250,000. It has an extraordinary

gain of $100,000 from a condemnation settlement received on

one its properties. Assuming a 30 percent income tax rate,

what is the net extraordinary gain? What will net income be?




Chapter 4-32

Extraordinary Loss: Schindler Co. has income before income

tax and extraordinary item of $250,000. It has an extraordinary

loss from a major casualty of $100,000. Assuming a 30 percent

income tax rate , what is the net extraordinary loss? What will

net income be?




Chapter 4-33

Total other (4,000)

Income from cont. oper. before taxes 79,000




Loss on operations, net of $135 tax 315

Loss on disposal, net of $61 tax 189


Income before extraordinary item 54,496

Extraordinary loss, net of $231 tax 539

Net income 53,957$

Calculation of

Total Tax

Example of Intraperiod Tax AllocationExample of Intraperiod Tax AllocationExample of Intraperiod Tax AllocationExample of Intraperiod Tax Allocation

$24,000

(135)(61)

(231)

$23,573


Note: losses reduce the total tax



Chapter 4-34

An important business indicator.

Measures the dollars earned by each share of common

stock.

Must be disclosed on the the income statement.


LO 6 Identify where to report earnings per share information.

Net income - Preferred dividends

Weighted average number of shares outstanding

Earnings Per Share

Chapter 4-35

Example Problem:

BE4-8


LO 6 Identify where to report earnings per share information.

Chapter 4-36


LO 6

EPS

Divide by weighted-average shares

outstanding

Illustration 4-17

Chapter 4-37 LO 7 Prepare a retained earnings statement.

Increase

Net income

Change in accounting

principle

Error corrections

Decrease

Net loss

Dividends

Change in accounting

principles

Error corrections

Retained Earnings Statement


Chapter 4-38

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2012

Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$

LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.

Before issuing the report for the year ended December 31, 2012, you discover a $50,000 error (net of tax) that caused 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2011). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012?


Chapter 4-39

Restrictions on Retained Earnings

Disclosed

In notes to the financial statements.

As Appropriated Retained Earnings.

LO 7 Prepare a retained earnings statement.


Chapter 4-40

All changes in equity during a period except those resulting

from investments by owners and distributions to owners.

Includes:

all revenues and gains, expenses and losses reported in

net income, and

all gains and losses that bypass net income but affect

stockholders’ equity.


LO 8 Explain how to report other comprehensive income.

Comprehensive Income

Chapter 4-41



Sales 285,000$



Operating expenses:

Selling expenses 10,000

Administrative expenses 43,000

Total operating expense 53,000

Income from operations 83,000




Total other (4,000)



Net income 55,000$

Other Comprehensive Income

Unrealized gains and losses on available-for-sale securities.

Translation gains and losses on foreign currency.

Plus others

+

Reported in Stockholders’ Equity



Chapter 4-42

Companies must display the components of other

comprehensive income in one of three ways:

1. A second separate income statement;

2. A combined income statement of comprehensive

income; or

3. As part of the statement of stockholders’ equity



Chapter 4-43


LO 8

Illustration 4-19Comprehensive Income

Second income statement

Chapter 4-44


LO 8


Combined statement

V. Gill Inc.

Combined Statement of Comprehensive Income

For the Year Ended December 31, 2012

Sales revenue 800,000$



Operating expenses 90,000

Net income 110,000

Unrealized holding gain, net of tax 30,000

Comprehensive income 140,000$

Chapter 4-45



Comprehensive Income – Statement of Stockholder’s Equity

Illustration 4-20

Chapter 4-46



Comprehensive Income – Balance Sheet Presentation

Illustration 4-21Presentation ofAccumulated OtherComprehensive Income in the Balance Sheet

Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders’ equity section of the balance sheet.

Chapter 4 - Student

Documents

Transcript of Chapter 4 - Student